Venture television transcript

"It's just such a one-sided affair. I just think it's totally unfair. We worked so hard, so long to turn it around and then lose it all."

CBC Television
July 11, 2000

Franchising
Full Story

Second%20Cup%20franchising.jpg

Franchising:

It's August, 1999, and Paul Dahlin is not happy to be moving out of his Second Cup coffee shop.

He paid $150,000 for the franchise three years ago, after being downsized out of a large corporation. The thought of running a neighbourhood coffee shop with a sure-thing national chain seemed worth the price.

The picture looks different these days. "Seven days a week, 365 days a year we were here. We turned it around, we made it very profitable and now all of a sudden, in a matter of weeks, we find out we're out of here," explains Dahlin.

The problem? As with most franchises, the franchisee pays the rent, but the chain holds the lease. Now Dahlin's lease is up, and Second Cup has decided the $60,000 he pays in annual rent is too high.

He thought that the franchise was going to be renewed and that the lease was progressing. He was wrong. The landlord and Second Cup couldn't agree on rent, so Dahlin's out the door and out his investment. No lease, no franchise.

"It's just such a one-sided affair. I just think it's totally unfair. We worked so hard, so long to turn it around and then lose it all."

Franchising is about a formula, and you might not believe how tightly that formula is controlled. All you need to do is look at the franchise agreement. Every chain has one. It's the contract that spells out the rules: that to be part of a successful system, you first pay a franchise fee, then you sign that you'll pay the royalties, pay into an advertising fund, let the chain control the lease, the look of the store, the supplies, just about everything.

Robins%20franchising.jpg

In Winnipeg, Dale Hunt also knows how little a franchisee can control. In 1985 he bought into Robin's Donuts, a chain of 250 stores coast to coast. "I really thought I'd found the golden goose. It was generating good cash and it was more work than I thought. But it was a good business," he says.

So good, he bought a second location, then in 1989 the chain went into expansion mode. They opened 3 stores around him in a year and a half.

"I had one store that went from 23,000 customers a month down to 17,000. The other one dropped from 19,000 down to 14,000," he says.

Before long, there were six stores in the area. Hunt couldn't do anything about that. It's all in the contract.

"All you have is a half-mile refusal rate. Which means that we can build a store on your sidewalk. And if you want to buy it, fine. If not, we'll sell it to someone else," explains Hunt.

Hunt sold his first store at a loss. He says he was still losing money on the second, so he decided to raise prices at which point he started to make money again. But that kind of thinking is not allowed.

"The franchisor didn't like it. They threatened me with all kinds of things, even the Combines Act," says Hunt.

Another issue was the cost of supplies. He believed he'd save money being part of a group with bulk purchases. But, he says it didn't work that way. He says he could have bought most of his supplies at the local wholesaler for cheaper than what they were selling it for.

It turns out the chain keeps any savings that come from bulk buying. It's right in the contract. "The franchisee agrees that such profits, commissions or rebates shall be the property of the franchisor."

Lawyer Ned Levitt represents Robin's Donuts. He says that "there are decisions that are made in any franchise system that are for the good of the system, but may not be ideal for an individual franchisee. Unfortunately that comes with the territory. That's a little bit of what you give up to be a franchisee."

And what about the company keeping the savings on supplies? Levitt says that "when the franchise relationship sours, there's no question that one of the issue that's raised very quickly by franchisees is-'You're charging me too much or you're taking rebates.' I see it all the time. Sometimes it has merit. But not all the time. Not even most of the time. Franchise systems don't grow to the size of Robin's if all they're doing is taking advantage of franchisees."

Dale Hunt settled out of court with Robin's Donuts last fall. He says he's glad he's out.

In February, Paul Dahlin and his lawyers approached Second Cup about covering the more than $100,000 he lost on his franchise.

Dahlin and his lawyer received a letter back from Second Cup. It says it will fight him in court if he wants; that any obligation on its part expired with the lease, after "attempts to negotiate a reasonable rental rate failed."

Second Cup declined our request for an interview, but it did send us a letter, saying that in its view, Paul Dahlin has no grounds to sue. It points out Second Cup's longstanding track record of good franchisee relations, and says that's one reason the chain continues to grow so quickly.

But Dahlin's got a comeback. It turns out that a sample budget the chain first provided fits his actual results almost to a tee. The $60,000 rent they now call "outrageous" and likely to cause bankruptcy, is not far off the $67,000 figure they cited as typical for rent plus utilities.

But as is usually the case in franchisee/franchisor relationships, Second Cup didn't consult him. And that's why Paul Dahlin has decided that if he ever gets back into the coffee business, he'll do it as an entrepreneur.

It seems as though he's headed to court, where he's sure to point out that where his sign came down, another went up. Second Cup competitor Timothy's World Coffee has taken over Dahlin's old location.

Forty per cent of franchises have their head offices in Ontario. The government is, considering new franchising legislation, which would mean that potential franchisees would get more information about costs upfront. Similar legislation already exists in Alberta. Hearings on the Ontario bill begin in March 2000.

Contacts:

Paul Dahlin
(416) 218-6901
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Fred Berni
Dynamic Performance Systems Inc.
(416) 201-0202

Ned Levitt
Franchise Lawyer, Levitt, Beber
(416) 865-6701

John Stainton
Alberta Lawyer
(780) 431-5747

Canadian%20Alliance%20of%20Franchise%20Operators%20Les%20Stewart.jpg

Canadian Alliance of Franchise Owners (CAFO)
Les Stewart, President
(705) 737-4635

Minister of Consumer & Commercial Relations, Ontario (Bill 33) Being brought forth by The Hon. R. Runciman
MINISTER OF CONSUMER AND COMMERCIAL RELATIONS - THE EXECUTIVE COUNCIL OF ONTARIO
35th Floor, 250 Yonge St
Toronto, ON M5B 2N5
416-326-8500
gateway.ontla.on.ca:80/library/bills/33371.htm

Private Members' Bill 35 being brought forth by Tony Martin.
ac.no.pdn|pq-nitramt#ac.no.pdn|pq-nitramt

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Risks: Eviction cheaper and faster than termination, Lease controlled by franchisor, Canadian Alliance of Franchise Operators, CAFO, Les Stewart, Ministry of Consumer and Commerical Services, Ministry of Consumer and Business Services, Ministry of Government and Consumer Services, Ministry of Government Services, Ontario, Tony Martin, Gouging on supplies, Rent increase, Must buy only through franchisor (tied buying), National press coverage, Encroachment (too many outlets put in territory), Franchisor controls retail prices, Secret kickbacks and rebates, Pro forma income statements questions, Tony Martin, National press coverage, Canada, 20000711 Venture

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